Car Loan Borrowers 'Need To Consider Running Costs'

When looking to borrow money to purchase a car, drivers need to take the time to factor in day-to-day running costs in addition to the initial value of the vehicle, it has been claimed.

The news comes as research released by RAC Loans reveals that the typical family car costs 5,627 pounds every year just to keep on the road. Meanwhile, insurance, fuel, tax and maintenance set consumers back by a total of 1,997 pounds per annum. And with the average automobile reported to be falling in value by 2,357 pounds in the first year after purchase due to depreciation, the financial services provider warned those contemplating buying or selling a vehicle that a lack of knowledge may "lead motorists down [a] one-way road to debt". As a result, the company warned that as day-to-day running expenses increase and depreciation costs rise, prospective buyers should consider how they are to finance a car whether this is through a loan or other forms of borrowing.

According to the company, those who take out a loan to fund their car purchase could find themselves in a favourable position both on the forecourt when picking out a model and when it comes to handling their finances as times go by. RAC stated that personal loans are a "popular choice" for those looking to raise money to get a car, as by having cash upfront they will have greater "bargaining power" when it comes negotiating with dealers, compared to if they opted for an expensive forecourt finance deal. Meanwhile, figures also show that about a third (34 per cent) of loans taken out with the firm are used to purchase a car, with just under 10,000 pounds the typical amount being taken out.

Commenting on the figures, Brian Spinks, head of lending at RAC, said: "When taking out a loan to pay for a car, it is important to ensure that you can not only afford the monthly repayments on that vehicle but also have checked that you are able to cover the growing costs associated with running your vehicle over time."

"Make sure you take into account things like insurance, road tax, MOT, servicing, fuel, repairs and wear and tear on things like tyres and brake pads. All of these add up and can be a nasty surprise if you've only borrowed enough to buy the vehicle. So taking a little extra finance initially up-front may actually save you money and time in the longer term, especially as the financing of small loans via say an overdraft or even a credit card can turn out to be a relatively expensive option."

Mr Spinks added that motorists need to make sure that they know everything possible about the car they are buying. In addition, to ensuring that the vehicle is "mechanically sound" drivers were advised to check that their vehicle has not been stolen or previously written off.

Earlier this year, the Sainsbury's Bank Car Buying Index indicated that 7.85 million Britons are planning on buying a vehicle between now and February. The study also showed that 31 per cent of motorists plan on financing their purchase, at least partially, through a personal loan. With loans now to account for 10.8 billion pounds of car buying, the popularity of this method of financing has risen by 28 per cent in comparison to the previous six month-period - a move which Steven Baillie, head of loans for the financial services firm, claimed could save motorists "thousands" of pounds.